A recent analysis of the lending policy of the top 125 mortgage lenders found that approximately 30% were now offering mortgage terms of 40 years of more. Furthermore this trend to longer mortgages is becoming more popular as first time buyers struggle to get on the property ladder.
Long term mortgages of 40 years and more have been criticised by some consumer groups who argue it is likely to increase the debt burden on householders. There are some problems inherent in 40 year mortgages.
1. Buyers will pay much more interest the longer the mortgage term is. This effectively reduces their disposable income over the period of their mortgage.
2. It maybe some people are continuing to have a mortgage into their retirement. Thus there are concerns as to whether people will be able to pay their mortgage payments in retirement.
3. Longer mortgage terms are often synonymous with borrowing far greater amounts. It enables consumers to get mortgages upto 5 or 6 times there salary. This increases their potential debt burden if interest rates were to crash or house prices were to fall. It makes the consequences of negative equity more serious.
4. Longer mortgage terms have enabled more people to keep buying and thus have been inflating house prices above their sustainable level
However despite these criticisms there are certain advantages of 40 year mortgage terms.
1. Without a 40 year mortgage many UK first time buyers would be unable to buy. In the long term buying is a better option than renting. It is true people may have mortgage payments close to retirement, but if they continue to rent rather than buy then they will also have to pay rents.
2. Over a period of 40 years inflation will reduce the real value of mortgage payments, making them easier to pay.
3. Home ownership gives greater stability than renting. If you stay renting then you are always at the mercy of a landlord.
4. If your financial situation improves then in the future you should be able to switch your mortgage to a more flexible system which allows owners the option to pay off the 40 year mortgage early.
It seems that 40 + year mortgages are here to stay. They are a response to the changing climate of the UK housing market and a reflection of increased flexibility. Whilst house prices remain valued at these record levels they will continue to remain an attractive option to UK homeowners
R.Pettinger manages a site about Mortgages in the UK http://www.mortgageguideuk.co.uk This site includes a guide to different types of mortgages and news about UK mortgages and the UK economy
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